This came up in conversation between my mom and I talking about Euros and how cool that is to me (Canadian). I then wondered why we can’t just have that everywhere and all she could say was “it wouldn’t work, what about less profitable countries” and I said “they’d just make/have less?” She did not like that answer and I really wanna know the real reason on why that wouldn’t work bc in my mind since we made up money why can’t we just make up how new money works???
Please explain like a teacher explaining why a kid can’t share 3 m&ms with 28 people
In: Economics
Effective monetary/currency policy is heavily dependent on economic factors which vary from nation to nation.
Control. Nations exert control over their economy by deciding how much of their money to print. Once you have a unified currency, nations no longer have that control. Europe managed to get it done because it’s relatively compact, mostly similar, and they have broad agreement on other things, such as the European Union itself. But that isn’t at all possible on a global scale.
You would need to have uniform rules and management of it, and that’d be a tough thing to get diverse countries like the US, Canada, China, Iran, Russia, and North Korea to agree to.
You see some of the pain points with a unified currency looking at the Eurozone. By ceding control of their monetary policy, countries who have an economic downturn have significantly fewer tools available to them to address it. Why would Germany and France weaken their currency because Greece is having an economic downturn.
1. Firstly, it’d require all countries (and their politicians/leaders/kings) to agree to one currency. Then the question arises: what currency will they use? Why should the Chinese use USD? Why should North Korea think all this is nothing but an American plot? Why shouldn’t Islamic countries say that Christian currency doesn’t adhere to Islamic values? You get the point.
2. How will a country convert to the common currency? Will you base it on prevailing exchange rate? If so, countries that are poor now, but growing fast will suffer. If it’s based on purchase power parity, large populous countries like India and China will suffer. Basically, nobody will agree to a meaningful conversation rate (because it’s complicated)
3. Trade between countries today affects the relative exchange rates between their currencies. Moving to a common currency will significantly hit export oriented countries like China, India and USA. So they won’t agree to a common currency.
4. Money as a behavior modifier: Powerful countries like USA use their dollar value to impose sanctions on misbehaving countries (like Russia right now). Using a common currency removes this incredibly powerful lever, or makes it vastly complex.
5. There’s no value to a common currency. Whatever you can do with a common currency, you can already do with individual currencies.
Europe was an incredible rare case where you had group of countries that were all small, politically stable, financially stable and rich (through slave trade and colonization, but let’s not go there now). They also have common political values and common enemies. They’ve been cooperating on mutual defense for hundreds of years (individual countries, although not collectively). They’ve been cooperating on mutual defense recently as NATO for the entire continent. So merging the currency was relatively simpler.
There’s no technical reason we couldn’t do that, but there’s a ton of political reasons why we can’t. The world is not unified enough to accept such a thing. Controlling currency confers a large amount of power to the group doing so. Look at the US sanctions on Russia, for example. Cutting off Russia from the international banking system is only possible because the US controls the dollar, which is used as the de-facto currency of trade in much of the international community. China is trying to position itself as an alternative to the dominance of the US dollar. Do you think that either country would accept giving up that (potential) power?
Why would the US want to tie its economic policy and currency with, say, Venezuela?
If you had one global currency, then whoever controlled printing that currency could buy anything they wanted from anyone in the world, just by printing that money and then using it to buy things.
It would be too much power concentrated in one place.
In general sharing a currency is beneficial if those places/people have certain freedoms of movement, exchange of goods and services, and investment.
There’s a concept called “[optimal currency area](https://en.wikipedia.org/wiki/Optimum_currency_area)”. It says that any currency has an optimal coverage that, if met, then the benefit of having the same currency is the maximum possible. If the actual area is smaller, then the places outside could benefit by having the same currency as the one you defined, and if the actual area is bigger, it would be beneficial for those places that share a currency to have different ones, maybe because there are certain limits on how people, goods and/or capital could move from one place to the other.
Monetary policy is generally best determined at the country level, and a large group currency like the euro comes with some huge downsides that are not always apparent right away.
We saw the big downside of a single currency when Greece had financial issues years ago. If Greece had its own currency, the financial crisis would have weakened the it’s currency relative to that of its neighbors. While this isn’t great, it acts as a sort of cushion. A weaker currency means that exports are cheaper. This means that as a country gets in a worse financial position, other countries want to buy more of it’s goods, helping to raise the economy.
When you have single currency, the whole eurozone changes as one. This means if one eurozone country has issues, there is no way cushion, and downturns will be worse.
On the opposite side, a single country gives huge benefits to stronger economies like Germany. Normally, if your economy is very strong, your currency will strengthen and decrease your exports. But again, even though Germany has been doing well, that natural swing in relative currency values does not happen.
Thus, you can kind of think of a single group currency as almost a wealth transfer from the poorest countries to the richest countries in a way that makes crises worse.
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